Böhm-Bawerk, Eugen Von

Böhm-Bawerk, Eugen Von

Eugen von Böhm-Bawerk (1851–1914) was an Austrian minister of public finance, a teacher at the University of Vienna, and an economic theorist. As a leading civil servant, he participated in the introduction of gold currency and in the elimination of the sugar subsidy (this latter in 1902). In 1904, when the increased financial demands of the Austrian army endangered the balancing of the budget, he resigned as minister of public finance and returned as a professor to the University of Vienna. In the field of economic theory, he was important as a critic and a systematic thinker. Of his critical papers, the best is his attack on Marxian value theory.

The publication of his three-volume Capital andInterest (1884–1912) established Böhm-Bawerk’s vast reputation among his contemporaries. Indeed, he was considerably overrated during his lifetime, but today he is insufficiently appreciated. Until about 1920, American economists compared his importance to that of Ricardo, but since then, his influence has been largely confined to Europe. To redress the balance is difficult. The main parts of his work are not completely integrated, and his way of thinking differs from that of recent, more rigorous, thinking.

Time and again, circumstances beyond his control interfered with the completion of his work. In 1888, his publisher began to print the second volume, the Positive Theory of Capital, even before the last chapters were completed. Böhm-Bawerk was under constant pressure to finish the remaining pages quickly. This unfortunate situation did nothing to improve either the clarity of his organization or the consistency of his thought. Later, his duties as public finance minister, his teaching obligations, and finally a serious illness prevented him from thoroughly revising two subsequent editions of the Positive Theory.

Theory of value. Böhm-Bawerk’s thinking grew out of the Austrian intellectual tradition, which was far removed from the scientific methods and the political and intellectual assumptions that existed in the United States and England. In the Austria of his time, Aristotelianism and ontology took the place of Western empirical skepticism and pragmatism, and faith in an all-powerful monarch and an all-wise and benign bureaucracy took the place of belief in the rights of the free citizen. Böhm-Bawerk applied the Aristotelian concept of final cause to economics. Economic value is the causa prima;, all other forces possess only a vicarious power derived from value; costs, for example, are intermediate causes (Zwischenursachen). This economic cosmos, with value as the central force, cannot be regulated exclusively by free competition; government intervention is necessary for large areas of the economy. (In his belief in government intervention, Böhm-Bawerk revealed himself as much the Austrian civil servant inspired by the enlightened reign of Joseph II as the economic theorist.)

Carl Menger, an older contemporary of Böhm-Bawerk, had postulated consumer value, or marginal utility, as the force that drives the social cycle (1871). He was the only Austrian economist who had an essential influence on Böhm-Bawerk; other inspirations came from William Stanley Jevons, Johann Heinrich von Thünen, and John Rae. Although Menger was a pioneer, he was unable to appreciate Böhm-Bawerk’s originality in constructing a system that reinterpreted and combined Menger’s marginal utility theory with Thünen’s and Rae’s concept of roundabout production.

Menger had discovered that the consumer value of any one unit in a group of consumer goods of equal form, quality, and quantity is equal to that utility that is lost in reducing this group by one unit—the marginal utility. This law is based on the principle that since equal units can be substituted for one another, the incidence of a real or imagined loss will fall where it hurts least, at the margin. The value of a good is therefore dependent on its marginal utility. Böhm-Bawerk gave Menger’s law a more general interpretation: the dependent utility of a commodity is transferable between groups of entirely different goods. His example of the loss of an overcoat illustrates his enlargement of Menger’s original law. An overcoat is stolen. In most cases, the person who suffers this loss will buy a new one; only a very poor man will be forced to go without a winter coat. Other consumers will make up the expense of replacing the coat from a relatively insignificant part of their budgets: they may give up visits to the theater or similar luxuries to pay for a new coat.

Another aspect of marginal utility theory that Böhm-Bawerk pursued in his own way is the analysis of total value. In this departure from accepted theory, he came into conflict with Friedrich von Wieser. This conflict aroused great interest in Oskar Kraus, an eminent member of the Austrian school of psychology, who was particularly interested in the relationship between the economic and the philosophical formulations of the problem of values (1901). Böhm-Bawerk and Wieser disagreed on the total value of a group of equal goods. Thus, if six pieces of bread, B1, B2, B3, B4, B5 , B6 (the total bread supply of one person) have the utilities U1, U2, U3, U4, U5, U6, and the value of these utilities is ordered as Ul > U2 > U3 > U4 > U5 > U6, Wieser calculated the value of the whole group at 6U6, the marginal utility times the number of units. BöhmBawerk, on the other hand, considered the value of the whole group to be the sum of all the utilities: U1±U2±U3±U4±U5±U6. If the consumer buys three units of a commodity, each at the price of 40¢, he buys the third unit because the utility of that unit is just a little higher than the utility of the 40¢. In case of need, he would have given $1.00 for the first and 80¢ for the second unit. The consumer’s total utility is:

($1.00 - 40¢) + (80¢ - 40¢) + 0 = $1.00.

Joseph Schumpeter later pointed out that BöhmBawerk’s calculation had a strong similarity to Alfred Marshall’s consumer surplus (Schumpeter 1954, pp. 1060–1062 and footnote 3) [seeConsumer’s surplus]. According to Schumpeter, Marshall and Böhm-Bawerk were correct in their analysis, under two restricting conditions: (1) the consumer’s marginal utility does not change, and (2) the utility can be measured. Böhm-Bawerk would probably have agreed with these conditions, because he took the position that utility numbers have a cardinal character, and utility therefore can be measured. This method of calculating total value together with his theory of substitution are Böhm-Bawerk’s essential additions to Menger’s value theory.

Böhm-Bawerk’s explanations of costs, of imputation or national accounting (Zurechnung), and of prices are all expanded versions of Menger’s ideas. Böhm-Bawerk surpassed Menger in his aggregate approach, and in the construction of his economic table. The picture of economic forces contained in this table combines the technical description of capitalistic production and the theory of revenue: wages, interest, and rent.

Theory of capital. Capital, analyzed in real terms, is the central phenomenon in the table. Capital goods are not permanent, and capital is therefore in need of continuous reproduction. Like his forerunners Thünen and Rae, Böhm-Bawerk defined capitalist production as roundabout or time-consuming: the longer the process of production, from the first injection of land and labor until the completion of consumer goods, the larger and better is the final product. The time interval increases faster than the quantity and improvement of the product; that is, a law of diminishing return operates with respect to time. The following illustration, first used by Wilhelm Roscher, demonstrates the increase of productivity with the introduction of capital: some poor fishermen increase their daily catch per worker from three fish to thirty fish by replacing hand fishing (without boat or net—production without capital) with boat fishing (with boat and net—production with capital). The weaving of the net and the building of the boat cost time and a supply of food, but the haul is ten times higher than before. Table 1 (adapted from Böhm-Bawerk) demonstrates the diminishing increase in units of production when a month of labor is injected into production periods of different length.

So far, Böhm-Bawerk’s theory is very similar to that of Thünen and Rae, but he went beyond them in two ways: he combined the idea of the wages fund with that of roundabout production, and he refined the marginal calculations. The goods that the fishing economy accumulates to keep the fisherman alive until he has finished weaving his net are the food reserve for the netmakers. Böhm-Bawerk

Table 1 — Effect of a month of labor in 1964 upon subsequent production

Economic period ending in

Units of production

1964

100

1965

200

1966

280

1967

350

1968

410

1969

460

1970

500

1971

530

1972

550

identified this accumulation of consumer goods, the food reserve, with the wages fund.

In a market economy, the same commodity structure exists but in a somewhat more complicated form. Consumer and producer goods are available in different stages of completion. In each stage, intermediate goods are brought forward one step, until they become finished consumer goods. At each moment there are goods in different stages of production. Because production is staggered and there are different starting points, it is not necessary to supply the entire wages fund at the beginning of roundabout production. Assume that the whole production process takes five years and that each period in which goods are brought one step toward maturity takes one year. In this case, Böhm-Bawerk argued, the supply of food, shelter, and housing must last more than half the length of the whole process, or more than two and one-half years. For workers who are busy with the five-year project, consumer goods for five years are necessary; for those workers engaged in a more advanced stage of production that will take only four years, a supply for four years is needed; and for the workers of the third stage, an advance of three years’ consumer goods is needed. For the whole roundabout production process, not five years’ provisions, but only (5 + 4 + 3 + 2 + 1 )/5, or three years’ provisions, are needed.

The length of the roundabout production and the structure of the wages fund are not fixed: like an accordion, each can be compressed or extended. They become fixed only if a number of other factors are also fixed: the available means of subsistence, the number of producers, the productivity of the different modes of roundabout production, the number and demand for consumer loans, the rent of land, the existence of capitalists, and, last but not least, the economic attitude of the population. All these factors together create a market where entrepreneurs, workers, and farmers, who need present goods to carry on production, meet bankers, financiers, and the saving public, who accept payments in claims against future production. In this market, the difference in value between present and future goods is established. Of all the forces operating in the market, the economic attitude of the population is the most important.

Böhm-Bawerk believed that a single axiom governs the difference in value between present and future goods: present goods have a higher value than future goods of equal quality, quantity, and form. The value of future goods diminishes as the length of time necessary for their completion increases. Lottini and Galiani had earlier discovered this agio or discount theory (Galiani [1750] 1915; Lottini [1574] 1941, pp. 109–110, paragraph 196). Böhm-Bawerk’s originality lies in identifying three reasons for this value discrepancy:

(1) Market situation. In a growing economy, the supply of goods is larger in the future than in the present; therefore, present goods have a higher value than do the same goods at any later time.

(2) Psychological motivation. Carelessness and shortsightedness induce people to underestimate their future needs.

(3) Technical preference. Roundabout production can be initiated immediately by the entrepreneur with present goods, while waiting for goods that become available only in the future will delay the beginning of production.

The third reason, which is very controversial, is a combination of the first and second reasons and Böhm-Bawerk’s theory of capital. The first two reasons explain why future goods have a lower marginal utility than present goods. The later production begins, the stronger the effect will be. To achieve the highest return, the entrepreneur buys present goods at a price that is higher than the price of equivalent future goods.

The present goods are the wages fund. Entrepreneurs or capitalists—Böhm-Bawerk did not distinguish between them—transfer these commodities to workers in the form of wages. Table 2 shows his computation of the wage rate that is consistent with full employment, maximum profit, and the spending of the entire means of subsistence. Five factors determine the ideal length of roundabout production: (1) the production schedules of different length and different productivity, as indicated in column 2 of Table 2; (2) the length of each step in such staggered roundabout production—in this case, one year; (3) the number of workers—in this case, 10 million; (4) the number of entrepreneurs or capitalists—in this case, 1.5 million, owning equal shares; (5) the size of the wages fund—in this case, $15 billion. It is assumed that production in stages will cause twice the original wages fund to be used up in the course of the entire process of production. With full employment, each capitalist employs 6⅔ workers (10 ÷1.5). Each capitalist owns a share of the whole fund of $10,000, which for the whole production period has to be multiplied by 2 (see above). The product $10,000 x 2 has to be divided by 6⅔ to find the total individual wages of $3,000 for the whole roundabout production period. In Table 2, 6⅔ workers per capitalist are used for a period of 6 years; therefore, the annual wages are $500. For periods of production less than 6 years, there would not be enough members at a wage of $500; for periods of production longer than 6 years, not all workers would be employed at this wage. For this length of roundabout production, the maximum profit is 10 per cent. For Böhm-Bawerk, this state of multiple equilibrium and maximal satisfaction is that toward which the forces of the market tend to gravitate.

Table 2—Roundabout production (annual wages, $500)

Roundaboutproduction,in years

Product ofone year per worker,indollars

Annual gainper worker(product minus wages),in dollars

Number ofworkers percapitalist

Gain inpercentageof the usedcapital

(1)

(2)

(3)a

(4)b

(5)c

a. (3)=(2)-500.

b. (4)=20,000/[500 x (1)].

c. (5)=(3) x (4)/100.

Source: Adapted from Böhm-Bawerk 1889.z

1

350

—150

40.00

Loss

2

450

—50

20.00

Loss

3

530

30

13.33

4.00

4

580

80

10.00

8.00

5

620

120

8.00

9.60

6

650

150

6.67

10.00

7

670

170

5.71

9.77

8

685

185

5.00

9.25

9

695

195

4.44

8.67

10

700

200

4.00

8.00

Table 2 is the appropriate climax of a bold and highly controversial composition. Böhm-Bawerk’s opponents attacked each part of the Positive Theory: marginal utility, the agio theory, and round-about production. Although he was a friendly and amiable man, Böhm-Bawerk enjoyed arguments; he answered his critics in a paternal and courteous way, but he did not always understand their views. He defended the Austrian concept of marginal utility in general, and his own interpretation of it in particular, against the remaining classicists, Wilhelm Lexis, Conrad, Dietzel, Achille Loria, Franz Oppenheimer, and others. The most important opponent of the agio theory was Ladislaus von Bortkiewicz, for a long time the only theorist of note at the University of Berlin. The target of Bortkiewicz’s attack was technical preference, Böhm-Bawerk’s third reason for the value discrepancy between present and future goods: Bortkiewicz considered technical preference to be only an application of Böhm-Bawerk’s first reason, the market situation (Bortkiewicz 1906).

The theory of roundabout production is still being debated. Even among Austrian theorists, there is disagreement about its validity. In the Anglo-American literature, capital analysis is carried on primarily, although not exclusively, in monetary rather than in real terms, and those economists who do deal with real capital follow the productivity theory of Leon Walras and John Bates Clark, according to which capital is a completely homogeneous factor yielding services without end in the process of production. As has been pointed out by Robert Kuenne (1963), Frank Knight, and Nicholas Kaldor, the productivity theory is at variance with Böhm-Bawerk’s theory, since Böhm-Bawerk defined capital as nonpermanent produced goods that are periodically extinguished. Oskar Morgenstern, a member of the Austrian school, also rejects the roundabout production theory; he believes that production can be explained completely with the law of diminishing returns and that the idea of roundabout production is superfluous. F. A. Fetter, G. Åckerman, E. Lindahl, Walter Eucken, and Frederick von Hayek have all constructed capital theories based on Böhm-Bawerk’s; they object to details in his theory, not to principles. For instance, Eucken and Hayek assert that averages for an individual share of investment and of the wages fund cannot be calculated. Ludwig M. Lachman (1956), one of the foremost interpreters of the Positive Theory, finds more validity in Böhm-Bawerk’s tables than do the other writers. The table, Lachman claims, is a model of an economic world of restricted progress, where development is exclusively due to the accumulation of capital. The table has also been compared to the uniformly progressive economy delineated by Harrod and Hicks. Clearly, it is still possible to defend Böhm-Bawerk’s approach.

(1884–1912) 1959 Capital and Interest. 3 vols. South Holland, III.: Libertarian Press. → First published as Kapital und Kapitalzins. Volume 1: History and Critique of Interest Theories, 1884. Volume 2: Positive Theory of Capital, 1889. Volume 3: Further Essays on Capital and Interest was first published as appendixes to Volume 2 of the 1909–1912 edition, and was printed in a separate volume in 1921.

(1886) 1932 Grundzüge der Theorie des wirtschaftlichen Güterwerts. London School of Economics and Political Science Series of Reprints of Scarce Tracts in Economic and Political Science, No. 11. London: The School. → First published in Jahrbücher für Nationalökonomie und Statistik, New Series, Volume 13, pages 1–82 and 477–541.

1890 The Historical vs. the Deductive Method in Political Economy. American Academy of Political and Social Science, Annals 1:244–271. → First published as “Historische und theoretische Nationalökonomie” in Jahrbücher für Nationalökonomie und Statistik, 1890; reprinted in Volume 1 of Böhm-Bawerk’s Gesammelte Schriften, 1924.

1895–1896 The Positive Theory of Capital and Its Critics. Quarterly Journal of Economics 9:113–131, 235–256; 10:121–155. → A series of essays under the titles “Professor Clark’s Views on the Genesis of Capital,” 1895; “General Walker Against Capital and Interest,” 1895; and “The Views of Mr. White, Mr. Bilgram, Professor MacVane, and Mr. Hawley,” 1896.

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Eugen von Böhm-Bawerk

Encyclopedia of World Biography
COPYRIGHT 2004 The Gale Group Inc.

Eugen von Böhm-Bawerk

The Austrian economist Eugen von Böhm-Bawerk (1851-1914) is known for his achievements in public finance, criticism of the Marxian system, and an original reformation of the theory of capital and interest.

Eugen von Böhm-Bawerk was born Feb. 12, 1851, the son of the vice president of the Moravian provincial government at Brno in Moravia. He was educated in Vienna and, after completing his legal and economic education, devoted a part of his career to the civil service in the Austrian-Hungarian monarchy and the other part to scientific work in economics.

Theory of Capital and Interest

In 1881 he started his university career with a pamphlet, "Whether Legal Right and Relationships Are Economic Goods." Between 1884 and 1888 he published his standard work, Capital and Interest, which made him famous. The first volume contained a history of interest theories. The second volume, The Positive Theory of Capital, was published in 1888. In this work Böhm-Bawerk, like other members of the Austrian school, claimed that all economic events and actions are finally determined by the consumer's estimation of utility and by his decision making (marginal utility).

So far Böhm-Bawerk had only refined the thoughts already developed by his teacher, Karl Menger. His originality lies not in this theory of estimation but in the usage of the time factor for the explanation of capital and interest. Man does not satisfy his needs directly; first he builds up capital (tools, machines, and plant facilities) by time-consuming action. Then, with these intermediate goods, he produces the means of consumption. Capital is a roundabout production which makes production more productive. Interest is a discount of future goods which are devaluated in comparison with present goods. For many reasons man undervaluates his future. If man gets more future good than the amount of present good he has lent, he will make a loan with his present good. For more than 30 years this work, especially the analysis of capital and interest, was considered a landmark in the development of economic analysis.

Civil Service

In the same year in which he published his theory of capital and interest Böhm-Bawerk went into civil service. Three times he was a minister of public finance (1895, 1897-1898, 1900-1904). He participated in the introduction of income tax and the gold currency and was instrumental in the elimination of the sugar subsidy at the Brussels Convention in 1902. Even as an overburdened high official, he found time to write his critical masterpiece, "Karl Marx and the Close of His System," the refutation of Marx's value theory. In 1904, when the increased financial demands of Austrian armament endangered the balancing of the budget, he resigned. The government wanted to give him an eminent position in a bank, but he was interested only in the resumption of his academic work.

Due to chronic circulation trouble, which eventually led to his death, he was not very productive after 1904. Because he could not write a new edition of his work, he defended himself against many adversaries in the form of appendix notes. Even in these additions he showed his inner assurance and discipline.

Owing to his character and his achievements, he gathered a great number of admirers and disciples. But the time of his greatest influence is gone, and the investigation of consumer strategy and of the technical capital structure has been pushed into the background by the Keynesian theories.

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Böhm-Bawerk, Eugen

The Columbia Encyclopedia, 6th ed.

Copyright The Columbia University Press

Eugen Böhm-Bawerk (oigān´ böm´-bä´vĕrk), 1851–1914, Austrian economist. Three times minister of finance (1895, 1897, and 1900), he initiated important tax reforms and farsighted financial policies. Rejecting the standard theory of value, Böhm-Bawerk posited a theory of interest and of capital that was based on psychological factors and on the nature of production. His theories marked an early point of departure from classical economics. As an economist of the Austrian school, he emphasized the importance of marginal utility, which holds that price is primarily determined by demand and that demand is determined by utility. The theory is considered subjective because the definition of utility depends in part on a person's expectations. Among his works are Capital and Interest (2 parts, 1884–89; tr. 1890, repr. 1970) and Positive Theory of Capital (1889, tr. 1923).

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